Entries from November 2015 ↓

Our hot new prime minister says when Parliament resumes this week that slashing middle class taxes will be job one.

So, mirabile dictu, most working grunts think they’ll be paying less and getting more. It’s the change-hope thingy. Fortunately you have this blog to disabuse you of such things. Let’s begin, shall we?

First, the tax cut primarily affects those earning between $45,000 and $89,000 and for them (the folks at the top end of this range) the savings equal less than $13 a week. The average will be about eight bucks. However, 66% of Canadians who file tax returns earn less than forty-five grand, so no tax cut for them.

That leaves nine million people who will get those few extra dollars a week. Meanwhile everybody believes the rich – the top 1% of us – will be reamed. And they like that. The prime minister made a big deal of this on the campaign trail, saying people who already give up close to half their incomes, “should pay their fair share” – which to those on the left means paying more.

So how many rich guys are we talking about?

The new top tax bracket will click in at a taxable income of $217,000 (the existing 29% rate travels to 33%), and this will affect just 264,000 taxpayers, or 0.75% of citizens. The Libs claimed this would raise $2.6 billion in net new revenues, which works out to an average of almost $11,000 per rich guy in additional tax. This, logic tells us, is ridiculous.

In order to save eleven grand in taxes, all a rich guy need do in 2016 is max out his RRSP contribution, since there is $25,370 in new room available – which will net a refund greater than the additional tax burden. Of course, if the rich guy is a doctor (about a third are), then by putting his or her spouse and kids on the medical professional corporation payroll he can slice his taxable income. Or convert from salary to dividends. Meanwhile entrepreneurs can establish a holding company and flow up cash flow from the Opco without tax being triggered, then bring it home through a family trust or dividends, making use of the dividend tax credit.

Of course, a rich guy with a fancy accountant can also use flow-through shares and garner tax-saving investment credits. He can establish an Individual Pension Plan (IPP) or a Retirement Compensation Agreement (RCA) to actually salt more pension money away than RRSP rules allow. And he can earn unlimited income in the form of capital gains from investment portfolios, and reduce the tax rate by 50%.

In short, there’s no way the addition of the new tax bracket will raise $2.8 billion for the new government to spend (last week the hot one committed $2.6 billion more to developing countries in the name of climate change). And if you’re one of the chosen 264,000 people now in the crosshairs, I trust you’ll be giving serious consideration to the above strategies, plus a whole lot more.

Craig Alexander is a smart, reasonable fellow who impressed me when he was a big cheese economist at TD Bank. These days he’s helping run the CD Howe Institute, and his conclusion is that by increasing rich guy taxes Ottawa will actually erode the overall tax base – a phenon many other jurisdictions have seen develop. The extra tax burden will trigger more tax avoidance activity and result in the 240,000 people reporting about 5% less in taxable income than they do now. That will strip $7.3 billion from the tax base, and the Libs will end up with 70% less than they claimed. Worse, this decline in the tax base will cost the provinces about $1.4 billion in revenue.

Well, so much for the rich paying for a tax cut for the middle class – which is now down to 33% of the population. But there’s more. According to Alexander, here’s an actual danger of trying to soak the successful:

“The reduction in tax rates for middle-income households is desirable, but the heavy taxation ?of high-income Canadians is at odds with the desire for more entrepreneurial activity. Canada is in an international war for talent. Canada needs competitive tax rates for high-income earners, or we run the risk of a brain drain and the risk of being less able to attract foreign talent. Excessively taxing the talent that fuels a more innovative, creative and successful economy is ultimately self-defeating.”

Meanwhile there are other costs to paying for the eight bucks a week a third of taxpayers will save. The TFSA contribution limit will be slashed from $10,000 to just $5,500. Income-splitting is being erased, so couples with a stay-at-home parent will be impacted. And contributions to the public pension plan will, says the prime minister, be increased as part of reform. The estimate is by about a thousand dollars a year. BTW, the CBC has reported our wealthy PM has put two personal nannies on the government payroll. They’re with him in Paris this week.

You may or may not agree with what’s coming later in a few days. But you should at least know the context. If you’re a .75%er, then 2016 will be the year you get serious about tax avoidance. Lucky for you, it’s easy.

He’s a billionaire. Sold his Toronto tech company to a megacorp. He also reads this blog. Posts anti-Garth comments. And he’s a doomer. The US is screwed, he says. Rates will never rise.

“I think you are only allowed to cry interest rate going up wolf 3 times,” he wrote lately. “You are going on 20 right now. Do you really want a 21 on Dec 16th? At least, can you admit that you’ve lost ALL credibility on this issue if I am right and you are wrong on Dec 16th?”

He called one day and I asked him where his billion is. “In GICs,” he said. Very progressive, I replied. Hope you like paying a load of tax on interest you haven’t received. Then he vowed if America indeed raises rates in two weeks he’ll actually invest his money. “But it won’t happen.”

But it will. At least that’s the call today, with financial markets currently giving 74% odds the US Fed will end almost a decade of cheap money at its next rate-setting meeting, scheduled for December 15-16. We’ve already discussed the implications here, including a bank forecast that this will up fixed-rate mortgages by almost three-quarters of a point, just as oil creep topples most markets. Already loan costs are swelling. So is the billionaire dude just another doomer loser?

This week will tell us a lot. Monday sees Fed boss Janet Yellen speaking to the Economic Club of Washington. Will she once again say a rate hike in a few days is a “live possibility”? The next day she slides into the witness chair before a Congressional committee, where there’s a 100% chance she’ll be asked if the US economy is strong enough to weather higher rates. And the day after that we’ll find out, when the November jobs numbers are released.

As you know, October’s stats killed it. More than 270,000 new positions were created – the best showing all year, dashing arguments the American economy had slipped into neutral, or worse. Expectations are for about 200,000 to be the headline number this week – judged to be seasonally strong and evidence the Fed is poised for lift-off the following week.

As also pointed out here, rates never rise once and halt. Or reverse. The very reason this initial increase has been so tortuous in its timing – anticipated month after month – is Yellen’s refusal to pull the trigger until it’s clear a tightening cycle can begin. The goal is to bring the cost of money into a historically normal range, so cheap loans and excessive liquidity stop distorting things like real estate and equity prices. That means a series of increases paced over a couple of years – and assiduous thought given as to when it can start.

Doomers say rates can’t rise, however, since this would jack the value of the US dollar – already appreciated by 10% in 2015 – and whack American exports. They argue higher rates will inflate the cost of carrying all government and private debt, so central banks would never risk it. And nihilists claim official stats – on job creation or economic growth, for example – are bogus, fraudulent and fabricated as part of a wider conspiracy concocted by our overlords. Yes, the same criminals who fill our skies with chemtrails, our water with flouride and have just invented carbon taxes.

Well, we’ll know soon enough. This has been the longest stretch in history where interest rates have not been increased. Something previous generations never noticed much, let alone debated, has turned into a symbol of human struggle. Especially here. Few people on the planet have shoved their snouts deeper into the debt trough than Canadians, who have again shattered all records for snorfling. In 2015 we borrowed money at five times the rate of wage increases, and three times the rate of inflation. Never before have people retired with as much unpaid debt, or started their careers with such epic loans. On Friday I showed you the most recent CMHC tally of new insured mortgages – the average borrowing equals 92% of the value of the houses purchased. So if bloating rates or moribund oil cause real estate values to decline just 10%, all equity is poof.

That won’t crash house values. It won’t send the economy into recession. The banks will still make money. People will continue to believe electing spend-and-tax people like Rachel Notley and Justin Trudeau was clever. The shrinkage will be quiet and the denial loud. But the damage of higher rates and lower times will be real for people who bought what they could not afford and felt entitled doing it.

This pathetic blog has done its part in the debate. The wolf’s still at the door. It won’t hold.

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The views expressed are those of the author, Garth Turner, a Raymond James Financial Advisor, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.